Recent research has acknowledged the crucial role of financial intermediaries’ balance sheet variables – namely, wealth and leverage – in the dynamics of asset prices. In this paper we use a prototypical “small-type” artificial financial market model with heterogeneous interacting traders to pin down how asset prices are affected by the complex interaction between balance sheet constraints and the endogenous evolution of trading rules.

Keywords: Agent-based model, Financial markets, Leverage cycle

JEL classification: C63, D53, G12, G18